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The Case for Berlin's Claim as Europe's Startup Capital The German capital's low cost of living and gritty brand attract entrepreneurs from across Germany and beyond.

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A friend told me in July that since she came to Berlin to work for an ecommerce and blockchain company, there hasn't been a single month when she hasn't had to change her route to the office because of construction.

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Her observation is part of a trove of anecdotal evidence that indicates Berlin has become the startup capital of Europe in the past few years.

Although London, Paris and Stockholm also claim to the title, the numbers make a strong case for Berlin these days. A key figure is that Berlin enjoyed a 9 percent jump in startups between 2015 and mid-2017, the highest percentage of any European city, according to the business credit-rating company Creditsafe. Similarly, Ernst & Young reported that 2017 was a banner year for Berlin's startups. Investment in German startups soared 88 percent last year to $4.3 billion, and the capital city accounted for a whopping 70 percent of the total.

Just a few of the hundreds of Berlin startups in recent years include Soundcloud, N26, Auto1, ElektroCouture, GoEuro, Lesara, Blinkist, DOJO Madness and Movinga.

Low rent prices have helped spark growth.

No one would have guessed in the early 1990s, immediately after German reunification, that Berlin would become an engine of the country's economic growth, let alone a startup star. The eastern part of the city -- the one that the Communists had owned -- was decrepit, needing billions of dollars worth of renovation, infrastructure and business development.

In fact, the challenge of melding the eastern section with the modern western part was so daunting that when parliament voted on whether to return the capital to Berlin or keep it in Bonn, Berlin won by a margin of less than 3 percent.

Today by many measures the city is still less developed than other European metropolises. But, there-in lies a major part of its attraction. Living costs and real estate prices in Berlin are far below those of other major cities on the continent, although they have been rising of late. For example, an apartment in Berlin costs a third of what a comparable place in London does.

After Berlin was reunified, massive economic shifts and demographic changes left the city impoverished, depopulated (population is still below pre-World War II levels) and with a lot of underused space. The first groups that took advantage of the low rents were not techies, but immigrants, artists and musicians. The growing cultural and party scene attracted other industries, such as media, fashion and tourism, which started changing poorer neighborhoods into hip ones.

A business boom usually leads to a jump in real estate prices. But, so much property was available in Berlin that companies continued to find generous chunks of office space for minimal prices. Those were not only important to the entrepreneurs, allowing them to keep their costs down, but also to startup employees looking for a new flat.

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Berliners love their "poor but sexy" brand.

Like London or Paris, there is a Berlin brand, which many locals define as poor but sexy. For a lot of new Berliners, this difficult to define quality was what made them put down roots in the capital. A vibrant culture, as well as cheap living expenses, prompted many to take nominal pay cuts to move to the city. Among them were thousands of students and young graduates unencumbered by debt -- since Germany's universities are free. Berlin's unique personality can be seen in its cultural activities, restaurants, cafes and bars and its residents.

An American once told me that "your German friends don't seem German at all." He meant they were more open-minded, adventurous and communicative than people in Frankfurt, Dortmund and Düsseldorf, even though many Berliners came from those cities originally. Berliners' divergence from the stereotypical German reinforces the idea that the city stands apart from the rest of the country. It didn't take long for companies to use this unique identity as a recruiting and branding tool around the world.

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The city is a magnet for talented workers from around the world.

Berlin has been an international city for much of its existence, so it's had a history of entrepreneurs hiring foreigners and aiming for global markets.

Talk to a startup's human resources manager these days, and chances are that they will tell you that they get resumes from Brazilians, Ukrainians and Indians -- to name just a few. Berlin's tech industries thrive on the city's multicultural immigrant communities. About half of the employees in startups are foreign-born.

Things that attract them include:

  1. Vibrant economy and job market
  2. Unique culture
  3. Location in the center of Europe
  4. The fact that it's easier to obtain a visa in Germany than in many European countries.

The bottom line is that Berlin's ability to hire talented people from around the world cheaply is one of its main competitive advantages.

Related: Why I Founded My Company in Poznan, Poland Instead of London

Berlin serves traditional as well as cutting-edge businesses.

Another thing that has propelled Berlin's startup rise is that its tech community is not just doing its own thing in isolation but serving traditional manufacturers as well.

Germany is known for its manufacturing and exporting prowess, with Made in Germany one of the world's most valuable labels. Historically, manufacturing has been spread across the country rather than bunched in a handful of locations. So, it isn't unusual to find a company with more than $1 billion in annual revenue based in a city of fewer than 100,000 people.

Since the dawn of the internet, manufacturers in far-flung locations have scrambled to keep up with rapid technological development, particularly digitalization. For many, the solution has been to interact with, or invest in, the Berlin tech scene. An example is carmakers' acquisition of the Berlin-based HERE mapping company for €2.8 billion.

Acquisitions aren't the only way that traditional manufacturers are obtaining the expertise they need from Berlin, however. Other approaches include joint ventures, research and development alliances, and participating in business incubator projects.

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There are other reasons why Berlin attracts startups.

Whether Berlin can continue claiming it is Europe's startup champ remains to be seen, partly because the low rents and salaries that have helped give it a competitive edge are finally beginning to rise. Rents alone spurted 20 percent in 2017.

But, the city has still has much to offer, like high-quality free education, government stability and a proven track record of being able to attract outside investment. Combined with the achieved critical mass of entrepreneurial and high-tech talent it should keep it a startup-capital contender for decades to come.

So, if you're a betting man or woman, think twice before putting your money on another European city taking the crown from Berlin any time soon.

Nicholas Borsotto Machado Monteiro

Lead Economist and Researcher of the Good Technology Collective

Nicholas Borsotto Machado Monteiro is the lead economist and researcher of the Good Technology Collective, a European think tank addressing pressing issues at the intersection of algorithms, AI and society.
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